Discarded economists rail against QE

First up, monetary curmudgeon and former RBA boffin, Stephen Grenville:

So why would it be a bad idea for the Reserve Bank to undertake QE?

To start with, it is unlikely to have much beneficial effect. America’s QE1, at the height of the 2008 financial crisis, was very effective because the Fed bought mortgage securities in a market which had frozen solid…Subsequent QE in America was much less effective.

It’s likely to be even less effective in Australia, where few private-sector borrowers tap the long end of the yield curve. Its main impact is likely to be in signalling that the RBA will strive hard to keep interest rates low for long, which will probably weaken the exchange rate and boost asset prices, particularly housing. Neither of these outcomes is desirable. The exchange rate is already well below what would be expected given strong commodity prices, and housing prices put us near the top of global rankings for household debt and housing unaffordability.

Whatever you do, don’t mention APRA, which already performed the role of curtailing misallocated credit into house prices in the last cycle, albeit far too late. As well, if the RBA is being forced to cut despite commodity prices being so high then perhaps Mr Grenville needs to update his working model of the Aussie economy. Commodity income no longer trickles into the economy thanks to poor tax policy, poor immigration policy and no follow through investment.

Those things should be fixed, but they’re not going to be so we need a much lower dollar and the RBA has little choice but to deliver it given its mandate. This discussion should not be about whether or not to do QE, it should be about how to make it work best.

But, so long as discarded monetary economists refuse to engage with APRA’s role that cannot happen. To wit, the impossibly stubborn Warwick McKibbin today, another former RBA boffin:

“I think it’s a big mistake,” he told The Australian Financial Review on Tuesday.

“You can’t just keep distorting the financial sector and expect capitalism to do its job. It’s too much government intervention distorting incentives.

“Once you get an interest rate below a certain level, it doesn’t stimulate the economy, but it does distort capital.”

“There’s a lot of evidence that by doing QE, firms are stopped from going out of business,” he said.

Too right. And productivity suffers. But Australian capital has been distorted for twenty years as the housing bubble grew and grew. To his great credit, McKibbin has fought it all along. But it’s not the RBA’s job to fix it. Only fiscal authorities can do that.

And APRA. Which Professor McKibbin will not mention to save his life!

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